How to prevent value-adding turning into over-capitalising…

Back in October I had the pleasure of working with a fantastic duo who had targeted Brunswick houses with possibilities and potential for their investment strategy.

Aside from their sheer drive and energy, their draw card was their professional experience; accounting and drafting. Being able to look into the possibilities, consider design options, understanding town planning and having a great eye for opportunity put them in a great position, and likewise, being able to run the numbers, build a budget and identify the critical point of over-capitalisation risk meant that their strategy could be a well thought out one.

After some varied auction disappointment, their luck changed for the better when this double fronted gem sold to them under the hammer for $900,000 on a well timed, round bid. While I was concerned about when they’d find the time in their busy weeks to conduct a shoestring cosmetic renovation, I knew they’d find a way.

Before

After

As they scoped out the painting, floors, bathroom and kitchen upgrade ideas, they also kept a keen eye on the budget to ensure they maximised their rental return and appeal of the property for prospective tenants without over-capitalising on a property which they may well one day develop or significantly renovate.

The property had to attract a quality tenant and the renovation needed to be fast.

 Despite a setback with the floor sanding plan due to degraded timbers in part, our duo sourced the right help for the floor sanding and coordinated their days and weekends over the summer break to meet the schedule.

The paint and flooring made the house sparkle but it was their firm decision not to spend money on a new kitchen and bathroom, and to make do with ‘freshening up’ the existing ones that enable them to come in under budget at $9000.

Many renovators get this part wrong. They continue to improve dated elements, falling prey to being too critical of the dated features.

It’s an easy mistake to make. The paint looks crisp, and highlights the trim in need of a coating. The new curtains highlight the dated light fittings. Then the old heater disappoints…. and so on. Recognising where to stop is vital, otherwise a tidy-up for maximising appeal as-is turns into a full renovation and suddenly the house is too valuable to knock over or strip in time.

Incredibly they had 32 groups through the first open for inspection, 19 tenant applications, an offer of six months’ rent in advance and they secured a great tenant  at a weekly rent of $600pw  (despite appraisals up to $500pw).

Our clients got it right though. They worked with what they had, scoped out the best effect for a tight budget, and they got in touch with a great property manager who worked in time with their project completion.

Who would have thought that a land-banking exersise in tightly-held Brunswick could achieve a rental yield result of 3.4%?

Wishing them years of fantastic capital growth and great adventures when phase two commences in due course.